Posted by: Ravi Saraogi | September 4, 2008

The Little Post that Beats the Market

I recently read the book ‘The Little Book that Beats the Market‘ by Joel Greenblatt. The book basically advocates a formula based approach to investing. The approach advocated by the author is rather simple. He talks about forming an index for each stock based on two variables, Price to Earning Ratio (PE) and Return on Capital (RoC), and then ranking them, with the highest rank given to the stock with the highest RoC and the lowest PE. The author calls this index a “magic formula” to deliver superior returns. In layman terms, what the author is asking us to do is to buy into companies which give high returns on invested capital and are available cheap. Makes perfect sense.

So, we did a study as to identify which Indian companies (only large caps) would make the top 20 list according to this criterion and came with the following results-

* Data collected from icicidirect.com

Do remember that the required investment horizon should be at least 3 years and the investor should stick to his decision to stay committed with such a portfolio irrespective of what the markets does. So invest in a mix of the above mentioned companies and stick to them for at least 3 years. And you should comfortably beat the benchmark sensex.

So says Mr. Greenblatt.

Published by Ravi Saraogi

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